LEASE DECAY OF HDB FLATS AND THE LEASE BUYBACK SCHEME

Abstract

This paper aims to empirically investigate the rate of lease decay of resale HDB flats. With the ageing of HDB leases and the implementation of the Lease Buyback Scheme (LBS), the erosion of housing equity from lease decay becomes a pressing issue to be addressed. A fixed effects hedonic pricing model is employed in this study. Empirical evidence suggests that the rate of lease decay does not conform to the Singapore Land Authority (SLA) leasehold table, which is assumed to be the basis of calculation for the LBS proceeds. Housing prices generally fall from a remaining lease of 99 to 78 years. However, the trend reverses and prices start to increase from a remaining lease of 77 to 49 years. The implied discount rates are also computed based on the empirical results. Discount rates generally showed a similar trend to the SLA Table and increase from a remaining lease of 98 to 81 years. However, as the lease decays from 80 to 49 years, discount rates start to decrease. Discount rates have also been on a decline over the years. These findings perhaps indicate that households are valuing the future consumption power of their inheritors more importantly. The empirical results do not correspond to the SLA Table and there is an information asymmetry between HDB and flat owners over the method of calculation of the LBS; there needs to be a more transparent and dynamic method of computing the LBS proceeds to boost take-up rate.